Medifast, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good day, and welcome to the Medifast Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Reed Anderson. Please go ahead.

[Reed Anderson:]

Good afternoon, and welcome to Medifast fourth quarter 2020 earnings conference call. On the call with me today are Dan Chard, Chairman and Chief Executive Officer; and Jim Maloney, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended December 31, 2020, that went out this afternoon at approximately 4

[Dan Chard:]

Thank you, Reed and good afternoon to everyone joining us. Thank you for taking time to be with us today. On the call with me today is Jim Maloney, our Chief Financial Officer. After I've provided some updates on our business performance, Jim will review the Q4 financial results in more detail. We'll then open up the call to take your questions. We closed the year on a strong note, with accelerating top line growth over the third quarter. Revenue increased 55.3% to $264.9 million in the fourth quarter of 2020 and we continued to execute strongly across all areas of the business. Earnings per diluted share were $2.36, up 42.2% increase over the prior year period. However, due to significant differences in tax rates between the periods, we believe income from operations is a better gauge of how we perform from a profitability standpoint. Jim will discuss our tax rates in more detail when he covers our financial results. For the fourth quarter, income from operations was $38 million, an increase of 103% versus the same period last year. Growth was driven by significant year-over-year and sequential improvements in the number of active earning OPTAVIA Coaches, which grew to 44,200 in the fourth quarter, another new record. Additionally, productivity per active earning coach increased 13.4% to $5,932 during the quarter compared to the prior year period. Our client community remains strong and we finished 2020 even better than expected with successful incentives, coach programs in Q4 that position as well for 2021. The initiatives we've implemented over the past one to two years are delivering consistent, meaningful progress, as evidenced by the results we announced today.

[Jim Maloney:]

Thank you, Dan. Good afternoon, everyone. Revenue in the fourth quarter of 2020 increased 55.3% to $264.9 million from $170.6 million in the fourth quarter of 2019. As Dan highlighted, we achieved another record quarter of active earning coaches ending the quarter with 44,200. This represents 39% growth as compared to 31,800 coaches in the same period last year, and a 5% increase from the end of the third quarter of 2020. Average revenue per active earning coach for the quarter was 5,932 compared to 5,229 for the fourth quarter of 2019 and down $6,329 in the third quarter of 2020, mainly due to timing of promotional activity from one quarter to another. The fourth quarter 2020 was the second highest level of revenue per active earning coach in our history. And we are very pleased with this strong result. Programming in the quarter was largely unchanged from last year's December dash, other than timing, indicating the strength of the underlying fundamental of our model. OPTAVIA branded products grew to 87.2% of our total company consumable units sold in the fourth quarter, up from 79% in the prior year period. Gross profits for the fourth quarter of 2020 increased 55.6% to $199.2 million compared to $128.1 million in the prior year period. Gross profit as a percentage of revenue was 75.2%, a slight increase compared to 75.1% in the fourth quarter of 2019. SG&A for the fourth quarter of 2020 increased $51.9 million to $161.3 million compared to $109.4 million for the fourth quarter of 2019. The increase was primarily due to higher OPTAVIA commission's expense as a result of growth of OPTAVIA sales, as well as increased salaries and benefits related expenses, partially offset by a decrease in sales and marketing expenses. SG&A as a percentage of revenue decreased 320 basis points year-over-year to 60.9% versus 64.1% in the fourth quarter of 2019. Income from operations increased $19.3 million to $38 million from $18.7 million in the prior year period, primarily as a result of increased gross profits partially offset increased SG&A expenses. Income from operations as a percentage of revenue was 14.3% for the quarter, an increase of 340 basis points from the year ago period. The effective tax rate was 26% for the fourth quarter of 2020 compared to 22.4% for the September 30th, 2020 year-to-date in compared to a tax benefit of 4.7% in the year ago period. During the fourth quarter of 2020, effective tax rate increased 3.8%, which reduced earnings per diluted share by $0.12 due to a discrete tax reserve recorded during the period. For the full year of 2020 earnings per diluted share was negatively impacted by $0.12 due to this discreet tax reserve.

[Operator:]

We will now begin the question-and answer-session. And the first question comes from Doug Lane with Lane Research. Please go ahead.

[Doug Lane:]

Yes. Hi. Good evening everybody. Can I start with the operating margin? I know you had a very strong margin in the third quarter, but I was wondering if you could help me understand why the operating margin was down 210 basis points sequentially. What changed in the fourth quarter on the expense line that wasn't there in the third quarter?

[Jim Maloney:]

Yeah. So, Doug, this is Jim. I don't know if you remember -- I don't know if you remember on the Q3 call, we mentioned that we were going to begin more heavily investing in supply chain and technology, and that really was the reason behind -- that those investments are really the reason why the margins, the operating margins declined in Q4.

[Doug Lane:]

Okay.

[Jim Maloney:]

So, we tried to highlight that in the call last time. So that's -- that -- that is generally the reason behind it.

[Doug Lane:]

Okay. And are these the same sort of investments you expect to carry into this year?

[Jim Maloney:]

Some of them are. Additionally, the supply chain and the technology investments will continue. We're also -- the decision to sunset the Medifast direct channel, that will also have somewhat of a impact on operating income percentage, because as you can imagine the direct channel doesn't have commissions with it, even though it's a smaller subset of our business, the sunsetting that will have a margin impact, not from a gross margin basis, but an operating income basis.

[Doug Lane:]

Okay. Got it. And then when you talk about the discrete $0.12 tax item, I take that to mean that there's no real structural change in your expected tax rate going forward, but it was more or less a non-repeatable kind of event?

[Jim Maloney:]

That is correct. We're -- it's a one-time charge. And at this point, we're currently not anticipating any additional tax reserves going into 2021.

[Doug Lane:]

Okay. That's helpful. And then sitting back here, your top line numbers have been very impressive. Your coach growth has been very impressive and obviously not sustainable with these rates, but still, it feels like the business is very strong. And I was wondering with these kinds of growth rates, have you taken a look at, perhaps changing your capital allocation strategy and maybe take on some leverage and accelerate your stock buyback here?

[Jim Maloney:]

Yeah. On the capital allocation front, we're first prioritizing organic growth with, first looking at CapEx spend. And we're not -- at least as of right now, we're not anticipating any acquisitions in 2021. So, with that, the decisions to pay dividends or share repurchases, those discussions are held at the board level. So that's really pretty much all I can really say about that.

[Doug Lane:]

Okay. Thank you.

[Operator:]

The next question comes from Sebastian Barbero with Jefferies. Please go ahead.

[Sebastian Barbero:]

Hi, team. Congrats on the quarter. I just wanted to start first, Jim, just hang on until the last question from Doug. Do you have a CapEx guide for the year?

[Jim Maloney:]

We're not really providing that guidance. All I can really tell you that there are going to be additional investments in technology and in supply chain. So that's also going to be in capital spend and it's also going to be in operating income. So it'll hit the P&L. So there will be additional projects that will happen in 2021, that'll hit the CapEx.

[Sebastian Barbero:]

Okay. And then, I was wondering, if you could talk a little bit more about your progress on the manufacturing fund. It's been a very limited amount of SKU out of stock last time I checked this morning, which points to improve capacity, considering the momentum of the business in early 2021. What is your manufacturing capacity today in terms of annual sales? And then how should we think about that ramping through the year? Should we expect you to hit that capacity to be able to support $2 billion in sales by the end of 2021 or earlier than that?

[Dan Chard:]

Yeah. So, this is Dan. We started adding capacity in the fourth quarter, actually a little bit earlier in the form of increased number of co-manufacturing partners. And that's continued on through -- is continuing on through the first quarter. It's not exactly a linear line, so, we'll -- but by the end of the year, we will have achieved that $2 billion. But right now, as we discussed in the last quarterly earnings call, our focus is taking the opportunity to now consolidate all of our volume to the OPTAVIA brand. That means, discontinuing the Medifast brands and using our capacity to focus on OPTAVIA. But what we're providing right now is that insight about moving towards the $2 billion, but we have adequate capacity to supply our fuelings throughout the year.

[Sebastian Barbero:]

Got it. Okay. And perhaps you can talk a little bit about the international business, how is that progressing relative to your expectations? And you mentioned in your initial remarks, the opportunity to look at other larger markets throughout the world, was wondering if you can give a little more details with that -- where that could be -- something like Canada or something like Europe? Yeah.

[Dan Chard:]

Yeah. Absolutely. So, we expanded a little over a year ago into -- to Hong Kong and Singapore. We characterize those as gateway markets into the Asia-Pacific regions. We have continued to add both infrastructure and the ability to deliver the same kind of quality experience that we have in the United States. As we said, we've established a distribution center in Hong Kong, as well as call centers in the Philippines. And Colombia, Philippines, specifically providing Chinese support for Hong Kong and Singapore. We've continued to build in Asia-Pacific in a way that's reflective of what we expect, meaning that, we're seeing the growth. We don't report on the actual volume involved, it becomes material, which would be fine as a 10% of our overall revenue. In terms of the second part of your question, it was -- we believe, and we tested before launching in Asia-Pacific the concept in Europe, in South America. And we believe that there is opportunity for us in those markets for the long-term. So, we see this as a continued opportunity to add to our overall addressable market. But that's as far as -- that's as much detail as we're giving right now in terms of what our further expansion efforts are.

[Sebastian Barbero:]

Great. Thank you.

[Operator:]

The next question comes from Kara Anderson with B. Riley FBR. Please go ahead.

[Kara Anderson:]

Hi, guys. Thanks for taking some of my questions. I kind of just wanted to jump back to the first question on operating margins. Can you discuss, I guess, with all the changes that are happening in 2021 investments in the sunsetting in Medifast brand, how you feel about that 15% operating margin target on the $1 billion revenue target?

[Jim Maloney:]

Yeah. So, since we're not providing guidance, that's a little bit challenging to just give you our feeling on that. So, I would say that -- just a couple of things to keep in mind, some of the items you should consider, as you're developing your model. Things like the in-person convention that we've budgeted for, if safety permits, that's probably a 70 basis point investments. The Medifast direct in sunsetting the classic brand, again, that's probably an additional 70 basis point impact to our operating income margins. And then investments in technology and supply chain, that actually will hit the P&L, I would say that's probably close to 100 basis point investment. So, hopefully that helps you directionally.

[Kara Anderson:]

It does. Thank you. And then as you begin to think about promotional plans for the year and kind of what you did in April and May of last year, can you give us a peak to anything that might look similar this year?

[Dan Chard:]

Sure. At this point, what we've seen is and as Jim indicated earlier in his remarks is that, the trends that we saw in the fourth quarter have continued roughly at the same or better as we move the first quarter. With that in mind, we're still evaluating. We haven't made the final decision on what the promotional structure will look like. So that's -- we know that we have the ability and that to promote and that the response, as you're -- as you saw in 2020 was very positive. We were also very focused on developing the natural business cadence that allows us to sell our products at -- within that structure that we've already put together.

[Kara Anderson:]

Okay. Great. Thank you. That's it for me.

[Jim Maloney:]

Thanks, Kara.

[Dan Chard:]

Thanks.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to Dan Chard for any closing remarks.

[Dan Chard:]

Thank you and want to thank everybody who's on the call, including any of our OPTAVIA Coaches who may have joined. As you can hear from our results in the fourth quarter, we remain confident in our business structure and our business concept, as well as our addressable market. We believe that our mission to offer the world lifelong transformation, one healthy habit at a time remains even more relevant as we move throughout this New Year, and look forward to reporting our first quarter results in several months. Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.